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Developers and state historic societies say the country will lose a tax tool integral to rehabbing historic buildings—and $84 billion of economic impact—if a provision in the Republican House tax bill becomes law.
Fear centers around the loss or reduction of the 41-year-old federal historic tax credit, managed by the National Park Service, that allows for a transferable credit up to 20 percent of qualified rehabilitation expenses for refurbishing historic properties. This credit, along with state additions, allows developers to secure financing to restore structures that would otherwise be too expensive to rehabilitate because of the high renovation costs.
The House tax bill ( H.R. 1) removes this federal credit entirely, and the Senate bill prolongs the time it takes developers to recoup the credit, making it less valuable to investors. Developers say a loss or reduction would make many successful projects impossible, and developers in the states that use it most say Americans will miss out on chances to preserve history while stimulating the economy.
“With a project like that, you get into a building, you start taking drywall down and get to the real bones of it and there’s a lot more repair and maintenance than you ever realize—it helps mitigate some of the risks,” Don Bush, chief financial officer of Lawyers Development Corporation, the group that is redeveloping the LeVeque Tower, the 47-story iconic Columbus, Ohio, mixed-use skyscraper, told Bloomberg Tax. “We would have never taken on a historic project like that without the historic tax credit.”
Since arriving on the scene in 1976, the Federal Historic Preservation Tax Incentives Program has led to more than 42,000 completed projects, more than $84 billion in investment and 108,528 jobs created, according to a 2016 report by the National Park Service. There were 1,039 completed projects and $5.85 billion in investment in 2016 alone.
A Joint Committee on Taxation report found eliminating the credit will create new revenue of about $3.1 billion over the next decade. There’s also a chance that investor money that would have gone to historic projects would flow to other places. But critics say the credit is a juice worth the squeeze.
“Banks often lend less for historic rehabilitation projects because they are riskier and more complicated, so the credit exists to fill a gap in the financing to incentivize developers to undertake historic rehabilitation projects,” Shaw Sprague, senior director of government relations at pro-credit group the National Trust for Historic Preservation told Bloomberg Tax. “Without that incentive in place, there is a significant gap in the financing of these projects. And you’d likely see only the easiest of historic projects move forward. And likely, your smaller and main street types of investments would certainly dry up.”
This effect would have a direct impact on state authorities that promote historical preservation and redevelopment, Sprague said. There are 34 states that have historic tax credit programs that are companions to the federal program. Losing the federal program means many will have to create new legislation, and many of the redevelopment projects seeking the state credits wouldn’t happen without the accompanying federal credit.
Developers in Virginia and Ohio, the number two and three states in number of federal historic tax credit projects, say loss of the credit would hamstring both an economic driver and a more environmentally friendly development option.
“The Historic Tax Credit is extremely important and has revitalized both big cities and small neighborhoods. Without it, rehabilitation of much of our state wouldn’t occur,” Elizabeth Kostelny, CEO of Preservation Virginia told Bloomberg Tax. “Developers use the credits on buildings that are often abandoned, and turn them into hotels and other spaces that creates both jobs and revenue for cities and the state.”
Julie Langan, director and state historic preservation officer at the Virginia Department of Historic Resources, echoed Kostelny’s concern.
“For all property stakeholders, elimination of the historical tax credit would be life-changing, and all Virginia citizens would suffer,” Langan said. “Private investment has brought revitalization to all citizens, but without the credit this would no longer be financially possible and a great amount of jobs would cease to exist.”
Since 2002, 1,286 projects using the federal tax credit were completed in Virginia, bringing in $3.15 billion in investment. Over that same time, 982 projects were developed in Ohio to the tune of $2.49 billion.
“We know that for ever $1 dollar the historic tax credit costs the United States that $1.25 is returned to the treasury,” Emmy Beach, spokesperson for the Ohio History Connection told Bloomberg Tax. “In Ohio, each historic project leads to 98 permanent new jobs and dozens of construction jobs. It’s something that just makes economic sense.”
Ohio’s state program provides for a tax credit up to 25 percent of qualified rehabilitation costs up to $5 million. Together, the federal and Ohio credits have spurned immense investment.
Ohio has awarded $348 million in credits triggering total investment of $2.4 billion, and leading to the restoration of 269 buildings, Penny Martin, spokesperson for the Ohio Development Services Agency told Bloomberg Tax. The federal and Ohio programs can work in tandem, but use of one credit doesn’t mean a project uses or qualified for the other.
Bush, the LeVeque developer, said the state and federal credits more than pay for themselves. He said his building expects to have 600 to 800 permanent jobs between office floors, retail, and restaurants. There will also be local tax revenue from a new hotel, restaurants, and 68 condominiums. He’s concerned that even if the Senate version of the bill becomes law, the diminished value of the credits will prevent projects like the LeVeque from getting funding.
“You’re looking for qualified investors to buy those credits. If you spread that out over multiple years, that just increases their net borrowing costs, because they’re going to be trying to bring the costs of those credits over five years,” he said. “It will have a direct economic effect on the cost of capital and the cost of building itself, which means they can either do less with that project or can’t do the project at all.”
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